The New Zealand dollar is set for major volatility this week as the Reserve Bank of New Zealand is set to become the first major central bank to begin raising interest rates after the COVID-19 pandemic.
Traders are likely to be watching the NZD/USD and AUD/NZD pairs closely on the foreign exchange market as both offer fascinating plays and even counter plays. The kiwi is going to be very volatile going into the decision as the outlook has become more uncertain due COVID-19 and a key jobs report release from the New Zealand economy prior to the decision.
It should be noted that the clouded outlook has caused investors not price-in a rate hike ahead of Wednesday’s interest rate decision by the Reserve Bank of New Zealand, meaning that the NZDUSD pair could be set for serious appreciation if the RBNZ hike. Many investment banks already expect that they will.
Westpac noted “We expect the Reserve Bank to lift the Official Cash Rate by 25 basis points to 0.5%. This would put it well ahead of its overseas peers. But that accurately reflects the local conditions that the RBNZ is facing”. ING and ANZ banks also expect a hike by similar amounts.
I think the NZDUSD pair is probably undervalued around 0.7000 cents and has large scope to appreciate if the central bank decides to hike. I suspect the 0.7300 to 0.7500 levels would seem a new and appropriate new range if they do follow through.
On the sentiment front traders have an increasingly bearish bias towards the New Zealand dollar, which is good for the short-term bull case. According to the ActivTrader market sentiment tool some 63 percent of traders are bearish towards the NZDUSD pair.
This could mean that traders disbelieve the rate hike scenario and remain short. Traders that are bearish need to be careful if the RBNZ hikes and could be trapped in a losing position for some time.
NZDUSD Short-Term Technical Analysis
The four-hour time frame continues to show that the NZDUSD pair trades inside a large broadening expanding wedge pattern, with these patterns often considered powerful breakout patterns.
According to the overall size of the pattern, a price range of 0.6800 to 0.7130 is present, with a breakout likely to foster a 400-point breakout, at a minimum. A sustained break above the mentioned wedge pattern should be considered extremely bullish for the NZDUSD pair and could cause a steeper rise towards the 0.7300 area.
NZDUSD Medium-Term Technical Analysis
Looking at the daily time chart it appears that an extremely large head and shoulders pattern has formed, which is warning of a massive price depreciation in the NZDUSD pair.
Bulls need to move the price above the 0.7460 level to invalidate the pattern, which could in theory start a massive run higher towards parity. Parity may be a stretch, but 0.8200 is certainly possible if the bullish scenario unfolds.